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I've suggested creating a new investment instrument: a performance-based bond.

The would pay a fixed interest rate like all bonds and have a fixed maturity (and perhaps call) date. In addition the bond would pay an optional bonus amount which would depend upon the earnings of the company. This way the bondholders would be able to participate in the growth or prosperity of the company.

The bonus would be paid on an annual basis, perhaps six months after the close of the measuring period. This would discourage trading to time getting the bonus. The price of the bond would vary depending upon interest rates and the expected (or announced) bonus.

The virtue of this is that the company could finance operations without having to issue common stock. There would be no incentive to manipulate pricing to game the issuance of options to management. Speculators would be less interested in the stock and the company could spend its time running its business instead of playing up to Wall Street investors.

For hundreds of years companies financed their operations with bonds or closely held stocks. With the creation of the stock market and the involvement of the greater public the focus has shifted from the fundamentals to speculation.

It all goes back to the "South Sea Bubble".


Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Mon Oct 17th, 2005 at 11:39:25 AM EST
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